The Senate Permanent Subcommittee on Investigation is alleging that Apple sheltered $44 billion from taxes. This is largely due to a number of accounting tactics and strategic incorporation that has allowed Apple to successfully and, more importantly, legally avoid paying a larger tax burden to the U.S. government.
The corporation’s most significant overseas subsidiary is Apple Operations International (AOI). AOI is incorporated in Ireland but holds its board meetings and keeps its records and bank accounts in the United States. Since the U.S. taxes companies based on where they are incorporated and Ireland taxes based off of where they are headquartered and managed, AOI falls in between the laws of both states and has not filed a tax return in five years. Likewise, AOI effectively had $30 billion of untaxed revenue between 2009 and 2012.
Congressional leaders are pointing fingers at Apple for not paying enough in taxes, however they must shoulder the blame themselves. At 39.2% (35% federal + 4.2% state average) the U.S has the highest corporate tax rate among OECD countries.
Despite having such a high rate, corporations’ share of federal tax revenues is nearing historic lows. The effective rate on corporate taxation in the United States is 13.7%, which is among the lowest in the developed world.
According to a study by analysts at J.P Morgan, there is approximately $1.7 trillion housed overseas by U.S. multinational corporations. The primary culprit is the U.S. system of worldwide taxation that taxes income earned overseas when it is repatriated to the US. This system incentivizes U.S. corporations to avoid taxes and keep their profits in offshore accounts. Furthermore, U.S. companies are put at a disadvantage to companies incorporated in states with a territorial taxation system that allows earnings to only be taxed in the state that they are earned. Additionally, President Obama’s council on jobs and competitiveness, export council, and fiscal commission along with the Commerce Secretary’s manufacturing council have all endorsed a switch to a territorial tax system. This chart courtesy of Sen. John Barrasso (R-Wyo.) compares the two approaches.
Here are the policies Congress should adopt moving forward while advancing towards a territorial taxation system. The federal corporate tax rate should be lowered from 35% to 25% to allow the US to remain competitive internationally. Secondly, all corporate tax expenditures, or loopholes, need to be eliminated. Lastly, Congress should gradually reduce the rate on repatriated earnings so that corporations will be incentivized to bring their profits back to the United States.
The bottom line: U.S. corporations will do everything possible to avoid taxes. So why should we encourage them to do so with high tax rates and an uncompetitive system? It is more advantageous to give Apple reasons to repatriate and invest their profits in the United States than waste resources attempting to unsuccessfully tax them more.